Court Considers Whether Non-Competitor Can Bring Unfair Competition Claim

In Famous Horse Inc v 5th Ave Photo Inc (Case 08-4523-cv, October 21 2010), the US Court of Appeals for the Second Circuit has held that Lanham Act unfair competition claims need only meet the 'reasonable interest' test for the plaintiff to have standing.

The case revolved around wholesale clothiers’ sale of counterfeit ROCAWEAR-branded jeans. The wholesalers, the defendants-appellees, sold some of the jeans to plaintiff-appellant Famous Horse Inc, which operates a chain of discount clothing stores in the New York area. Once Famous Horse discovered the jeans were counterfeit, it stopped purchasing them, but the appellees continued to sell the counterfeit jeans to other discount stores and, while doing so, falsely advertised that Famous Horse was a “satisfied customer”.

In response, Famous Horse brought trademark infringement and unfair competition claims under the Lanham Act, as well as a variety of related state claims, against the appellees.

Famous Horse first claimed trademark infringement under both §43(a) and 32 of the Lanham Act based on the appellees’ claim that it was a “satisfied customer”. The district court dismissed both claims, because “plaintiff must allege facts establishing, inter alia, that a defendant’s use of plaintiff’s registered mark is likely to cause confusion as to the source of a product”. Since Famous Horse had never claimed that the use of its marks was connected to the source of the products, it had failed to state a case.

On appeal, the Second Circuit held that the district court was in error, as “consumer confusion triggering the Lanham Act... need not be solely as to the origin of the product”. Instead, a party has a §43(a) claim if it was falsely accused of being a satisfied customer, since §43(a) “specifically defines misrepresentation causing confusion as to affiliation, association or sponsorship as infringing activity”. Moreover, a party has a §32 claim if use “of a registered mark... is likely to cause confusion, or to cause mistake or to deceive”. Because the false claim of being a satisfied customer was likely to deceive and confuse as to association, the court vacated the district court’s dismissal of Famous Horse’s §32 and §43(a) claims.

Famous Horse also claimed unfair competition as a result of the appellees’ sale of counterfeit ROCAWEAR branded jeans. The question on appeal was whether Famous Horse had standing to bring an unfair competition claim despite not being in direct competition with the appellees nor owning the ROCAWEAR mark.

The Second Circuit noted that, while the Lanham Act’s language is “extremely broad” (allowing actions by “any person” who believes they are damaged by “any false designation of origin”), courts have narrowed the standard to apply only to commercial plaintiffs. However, while courts agree that only commercial plaintiffs can bring an action, there is a circuit split over whether an action can be brought by a non-competitor. Three circuits (the Seventh, Ninth and Tenth) require any plaintiff to be in actual competition with the defendant (the alleged user of the false mark). Three other circuits (the Third, Fifth, and Eleventh) use a “more flexible standard”, where actual competition is merely taken into account, not a requirement.

The Second Circuit has been somewhat in-between the two sides. It held that competition was a requirement in the case of Telecom Int’l Am Inc v AT&T Corp (280 F3d 175 (2001)), but in other cases held it was not a requirement - although where the parties were not in competition, the court “tended to require a more substantial showing” of injury and causation. Despite highlighting the circuit split, the court held that an ultimate resolution of the question was not necessary as the parties were competitors:

“Although Famous Horse sells at retail, and appellees primarily sell at wholesale, the goods they sell are in direct competition in the marketplace, and appellees’ products are supplied to retailers in direct competition with Famous Horse.”

To determine whether a plaintiff has standing, the Second Circuit uses the “reasonable interest” test:

“[I]n order to establish standing under the Lanham Act, a plaintiff must demonstrate (1) a reasonable interest to be protected against the alleged false advertising, and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”

Using this two prong test, the court first found that Famous Horse had a reasonable interest to be protected because:

• its reputation for selling goods at low prices was harmed when customers saw similar jeans for less in other stores; and
• customers who learned about counterfeit Rocawear jeans would assume that Famous Horse also sells counterfeit jeans.

Second, because Famous Horse alleged lost sales and future harm to its business as a result of those two injuries, the court held that it also had a reasonable basis that it was likely to be harmed by the false advertising. Therefore, although the court noted that the claims of damages would be difficult to prove at trial, the claims were “sufficiently plausible” to survive a motion to dismiss.

Judge Livingston concurred with the majority’s opinion in all but its analysis of the 'reasonable interest' test. He stated that he thought the two-prong Second Circuit framework should be abandoned for the Third Circuit’s five-factor Conte Brothers test, because the test gave “greater structure”, and would allow the court to “define the term ‘reasonable interest’ with greater precision”. The factors are:

•  the nature of the plaintiff’s alleged injury, and whether it is the type of injury that Congress sought to redress; 
•  the directness or indirectness of the asserted injury; 
•  the proximity or remoteness of the party to the alleged injurious conduct; 
•  the speculativeness of the damages claims; and 
•  the risk of duplicative damages or complexity in apportioning damages.

Using the five factors, Judge Livingston stated that he would not have found that Famous Horse had standing to bring its unfair competition claim, primarily because: 

•  the injury was indirect; and 
•  there was a party (the owners of the ROCAWEAR mark) much more proximate to the appellees’ conduct.

This article first appeared on WTR Daily, part of World Trademark Review, in November 2010.